The U.S. Treasury Department has begun withholding the Home Affordable Modification Program (HAMP) financial incentives for Wells Fargo, Bank of America and JPMorgan Chase. The Treasury's decision is based on first-quarter compliance and performance reviews that found the three mega servicers are in need of substantial improvement in evaluating borrowers' eligibility for the program. Their incentives will continue to be withheld until the servicers correct the identified shortcomings, the Treasury says.

Ocwen Loan Servicing was similarly categorized as in need of substantial improvements, but the Treasury has opted not to halt its incentives, because Ocwen's performance was negatively affected by the large and high-touch HomEq Servicing portfolio that the company acquired during the compliance testing period. Ocwen closed on that transaction in September 2010.

At least two servicers disagree with the report's findings. Wells Fargo, which plans to undergo the formal dispute process, says the report contains stale data that is based on HAMP activities from 2010. The report fails to reflect process improvements the bank has made since the reviews took place, said Wells Fargo Home Mortgage spokesperson Teri A. Schrettenbrunner.

"We are willing to accept fair and accurate criticism," Wells Fargo said in a statement. "We realize that continued improvements are needed, but this report does not fairly reflect our leading role in making loan modifications."

The Treasury's report states that Wells Fargo had a 27% error rate in calculating borrowers' income. Wells Fargo's most recent internal audits show the bank's income calculation error rate is 4.5%, Schrettenbrunner says. The Treasury sets its income calculation error benchmark at 5% or less.

A Chase spokesperson said the bank also disagrees with the Treasury's assessment. "We have made significant improvements since the modifications that Treasury reviewed and continue to work hard to keep improving our processes and controls," the spokesperson said.

Bank of America spokesperson Dan Fraham said the bank is committed to continually improving its HAMP processes.

"We acknowledge improvements must be made in key areas, particularly those affecting the customer experience," Fraham said. "We have made great progress in several key performance areas, and, in the first quarter, Bank of America was responsible for one of every four modifications completed under HAMP. We believe future reviews will confirm that progress."

In response to concerns about old data, the Treasury's acting assistant secretary for financial stability, Timothy Massad, said the nature of the review is backward-looking.

"It's based on testing and sampling," he said on a conference call Thursday. "If the servicer fixed the problem, then we will go back and review that, and if we determine they have [cured the deficiency], then we will resume payment. But otherwise, we stand by the conclusions that we put out."

The Treasury published assessments for HAMP's 10 largest servicers and found all 10 to be lacking to some degree. Six other servicers - American Home Mortgage Servicing, CitiMortgage, GMAC Mortgage, Litton Loan Servicing, OneWest Bank and Select Portfolio Servicing - were found to be in need of moderate improvements, which means their incentives will not be withheld but may be halted in the future if they fail to make certain identified improvements.

The Treasury report rates servicers' performance in three areas: identifying and contacting homeowners; homeowner evaluation and assistance; and program reporting.

The Treasury says it reserves the right to permanently reduce incentives for Bank of America, Chase and Wells Fargo if they do not take steps to make improvements in the areas identified. Making Home Affordable is a voluntary program, and the Treasury cannot fine or penalize servicers. The withholding of incentives will not affect incentives paid out to investors or homeowners.

Earlier this year, Neil Barofsky, then-Special Inspector of the Troubled Asset Relief Program (SIGTARP), chided the Treasury for not taking a firmer stance against non-compliant servicers. According to congressional testimony from Barofsky, the Treasury's reaction to servicer non-compliance "appears to be driven largely by the fear that forcing servicers to comply…will drive them away from HAMP."